RPS Case Study, Part 1

The following Case Study is written by Vera Cole, one of the course developers. The framework of this Case Study reflects actual Pennsylvania policy and data. All information about stakeholders, especially assessments related to the likelihood of participation in nonmarket action and the strategy that may or may not be evoked is the author's opinion and presented in a manner to best demonstrate the lesson content of this course. This Case Study does not necessarily represent the actual position or strategy held or planned by any named stakeholder.

ISSUE

Background

In 2004, Pennsylvania enacted the Alternative Energy Portfolio Standards (AEPS) Act, which provides “for the sale of electric energy generated from renewable and environmentally beneficial sources, for the acquisition of electric energy generated from renewable and environmentally beneficial sources by electric distribution and supply companies and for the powers and duties of the Pennsylvania Public Utility Commission.” Here is the full text of the Public Utility Commission's Implementation Order, if you are so wonkily inclined.

The type of policy covered by the AEPS Act exists in other states where it is most often called “Renewable Portfolio Standards.” For a full description of RPS programs across the country, including definitions, data and summary maps, see the Database of State Incentives for Renewable and Efficiency (DSIRE) website (You can search for RPS under "program type.")

Among other things, the AEPS Act established that a certain percentage of the electricity sold in Pennsylvania must come from renewable energy sources and a specific percent must come from solar energy. (This is called a “Solar Carve Out.”)

To comply with the Act, businesses that sell electricity in Pennsylvania are required to submit Alternative Energy Credits (AECs) corresponding to the currently required percentage. (The term “AEC” is specific to PA and means the same thing as Renewable Energy Credit or “REC”, the more widely used terminology.)

A REC is an electronic certificate indicating that 1,000 kWhs (1,000 kWh = 1 MWh) of electricity has been generated from renewable fuel source. When the fuel source is solar, it is an SREC.

Solar electric systems have a power rating that indicates their capacity to generate electricity from the sun. Power ratings are given in Watts. A kilowatt (kW) equals 1,000 Watts and a megawatt (MW) equals 1,000,000 watts. Electricity that is generated is energy measured in watt-hours, often kilowatt hours (kWh) or megawatt-hours (MWh). (For a review of energy and power, feel free to re-engage with the EGEE 102 course website).

For example, a home in Pennsylvania with a 5 kW solar electric system will likely generate about 6,000 kWh per year (this depends on a lot of factors such as shading and orientation/azimuth). The owners of this system will earn six SRECs per year since 6,000 kWh = 6 MWh. These owners can sell their SRECs to the businesses (utilities) in PA that must comply with the AEPS. As long as the system is grid-tied (connected to the electrical grid), the owners are entitled to earn and trade SRECs. It does not matter where the electricity is used or by whom. Please note that partial SRECs are rarely accepted for sale. Annual SREC totals from an individual supplier are thus rounded down to the nearest whole SREC. (So even if the above mentioned system generated 6,200 kWh or even 6,900 kWh, they would only get credit for 6 SRECs.)

When a utility is forced (by the AEPS Act) to buy SRECS, it adds to the cost of the electricity because they must be allowed to recover these extra costs. This causes the price of electricity to rise for all customers (“rate payers”), however minimal. The more SRECS the business must purchase and the higher the cost of the SRECs, the greater the increase in electricity prices for all rate payers. (Keep in mind that this rate increase is almost certainly minimal, significantly less than $0.01 per kWh.)

SRECs are most often traded on the open market, though some special SREC incentive programs exist in some states. They are essentially auctioned off to businesses who need to purchase them. [For more detail about how this process works, see PJM EIS, the administrator of the Generation Attribute Tracking System (GATS)].

Solar electric system owners want to get as high a price as possible for their SRECs. The businesses that must comply with the AEPS want to pay as low a price as possible. The actual price (“settlement price”) is set by supply and demand.

The percentages in the AEPS (the carveouts) drive demand. The higher the percentage, the greater the number of required SRECs for compliance. This demand, in turn, drives supply. If a small business owner is thinking of putting in solar, the prospect of being able to sell SRECs may make the owner more inclined to pony up the significant capital that is required to install a solar electric system. The potential for SREC revenue may also make the bank more likely to approve a loan for the installation.

In 2008, the average settlement price in Pennsylvania for an S-REC was $230. In 2009, the average was $260. In 2010, the average was $325. In January 2012, the settlement price was $20 and by December of 2016 it had dropped to $7! (The price has been hovering in the $3 - $4 in the summer of 2017. For real time pricing, see Flett Exchange or SRECTrade.) The images below provide a snapshot of prices in 2010 when prices were good, and in 2016, when they were significantly lower.

What happened? In 2009, Pennsylvania opened a rebate program for solar projects (solar electric and solar hot water). Along with other temporary factors, this caused the industry in Pennsylvania to surge—installing 46.5 MW in 2010. (In 2009, 4.4 MW were installed.) In fact, according to the Interstate Renewable Energy Council, Pennsylvania was 6th in the country in 2010 for newly installed solar electric capacity.

This surge in supply swamped the percentage of solar electricity required by the AEPS and SREC prices plunged. The consequences of this were widespread. Consumer interest in buying and installing new systems dropped considerably. With SREC returns this low, lenders would not finance projects. Solar installers closed shop or moved out of state. Existing solar installations were in trouble with revenue from SRECs falling far below expectations.

In response, a Bill was proposed in the state House of Representatives that would accelerate the ramp-up of required percentages for solar electricity. The proposed increase for years June 2012 - May 2013 to June 2015 - June 2016 is shown in the figure below.

In addition to increasing the RPS percentages in the near term, the bill would also “close” PA borders. Under the original policy, electricity retailers can buy SRECs from a solar generation facility anywhere within the PJM region, which includes all or parts of Delaware, Indiana, Illinois, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and the District of Columbia. House Bill 1580 requires that SRECs used to comply with AEPS policy must come from solar generators located in Pennsylvania.

Status

Sponsored by Chris Ross (R-Chester), PA House Bill 1580 had 111 co-sponsors. However, neither the House or Senate was able to put it to vote before the legislative session ended and the 2012 election took place. (Since then, several new bills have been announced to revise the RPS but as of yet, none have been put to vote. In principle, this "issue" remains alive in PA.)

A Short Note Regarding Energy and Financial Calculations

Most of this should be a review from EGEE 102, but this will help provide some perspective on this case study (and help you with this week's assignment!).

If electricity costs $0.15/kWh and you use 100 kWh, it will cost you: $0.15/kWh x 100 kWh = $15.00

There are 1000 kWh in a MWh

A commonly-used economic indicator in renewable energy and energy efficiency projects is "simple payback." Simple payback indicates how long something will take to pay for itself, ignoring ongoing costs such as maintenance. To calculate simple payback, you simply (no pun intended) divide the upfront cost (after incentives) by the annual savings you will realize by implementing the measure. For example, let's say I spend $5 to buy an LED to replace an incandescent bulb. I calculate that it will save me $4/yr in electricity costs. My simple payback would thus be: upfront cost/annual savings = $5/$4 per yr. = 1.25 years.

As indicated above, SRECs add value to your solar PV array. Let's say you have an array that will generate ~6,000 kWh/yr, which is 6 MWh and thus 6 SRECs. Because Pennsylvania has a "net metering" law, the utility must pay you the same for electricity generated by your system that you pay them for electricity that they supply. (This varies a bit by state, but most net metering states require the utility to pay at or near the full retail price that you pay). So if you pay $0.12/kWh, they pay you $0.12/kWh for each kWh your system generates. (The power company will not actually "pay" you for this. It will just take this off of your monthly bill.) Net metering also means that if you generate more electricity than you are using - say, on a nice summer day or sunny winter day - then that extra electricity will be used to compensate for times when you are using more electricity than you are generating.

Net metering is a very important (and increasingly controversial in some states) incentive for solar, but remember that SRECs provide an additional incentive. In the glory days of 2008, you would have gotten: 6 SRECs x $230/SREC = $1,380 in addition to your savings (this does usually come as a check). But in 2015 you would have probably received: 6 SRECs x $20/SREC = $120. Quite a big difference, eh? That is why SRECs are such an important policy mechanism. They can substantially alter the financial calculation for renewable energy systems.

When the SREC prices were so high in PA soon after the AEPS was adopted, it was common to get paybacks in the range of 7-10 years. But now, even with low SREC prices, a building with good solar exposure can usually expect to have a simple payback of 7-10 years or less, depending on financing, state incentives, and a few other considerations. This is mainly due to lower prices for solar panels. In a good SREC market, simple paybacks can be in the sub-5 year range, which was unheard of a few years ago. It is a very dynamic marketplace, due to a mixture of market and nonmarket forces!

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